Two U.S. regulators have approved rules that allow a ‘stay-in’ clause for over-the-counter (OTC) derivatives contracts, a provision needed in the case of winding-down a systemically important bank.
The ruling from the U.S. Federal Reserve and the Office of the Comptroller of the Currency reflects the planned changes made by the International Swaps and Derivatives Association (ISDA) and 18 major banks.
Under the protocol, due to come into effect from January 2015, it will impose a 48-hour hiatus on counterparty’s right to terminate a trade if the bank gets into trouble. This allows regulators more time to work out a rescue plan for a large bank before the troubled bank causes a systemic failure.
According to a statement from the Federal Reserve, the two regulators will apply the protocol not only for OTC derivatives, but for eligible margin loans and repo-style transactions.
“The interim final rule ensures that these transactions may continue to qualify for the current treatment under the two agencies’ capital and liquidity rules if the transactions become subject to potential stays under foreign special resolution regimes,” the Fed states.
U.S. Regulators Adopt ISDA 'Stay' Provision For OTC Derivatives
Two U.S. regulators have approved rules that allow a ‘stay-in’ clause for over-the-counter (OTC) derivatives contracts, a provision needed in the case of winding-down a systemically important bank.